Offset mortgages offer alternative to low savings rates

16 March 2010 / by Rachael Stiles

Offset mortgages provide a solution to borrowers who are earning a paltry amount on their savings once inflation and low interest rates have taken their toll, moneysupermarket.com has suggested.

The comparison website has calculated that borrowers can reduce their mortgage interest payments by more than £11,000 over the life of their mortgage, and repay it five years earlier by choosing to offset their savings against their mortgage.

An offset mortgage enables borrowers to pay less interest on their home loan, whilst not earning any interest on their savings.

Moneysupermarket has calculated that based on a £100,000 loan, at a competitive rate from Woolwich mortgages, and with £30,000 in savings, the homeowner would only pay interest on the remaining £70,000. A savings account would have to pay at least 4.5 per cent interest to match this deal.

With inflation at 3.7 per cent in January, and the base rate at a record low of 0.5 per cent for the last 12 months, savers have few opportunities to gain real returns on their savings, but those with a mortgage could find an alternative with offset mortgages, moneysupermarket believes.

Hannah Mercedes-Skenfield, mortgage channel manager at moneysupermarket.com, said "the advantages of an offset mortgage are becoming more attractive to borrowers who also have a decent savings pot.

"At times like these, when interest earned on savings after tax is potentially lower than the interest consumers pay on their debt, offsetting can be a great option," she explained.

Taxpayers stand to benefit even more, she continued, especially higher rate taxpayers, as since there is no interest being earned on savings, there is no tax to pay.

"It's worth noting however that offset deals won't necessarily be the right option for all prospective borrowers," Ms Skenfield added. "The savings that consumers could realise will depend on the proportion of the mortgage debt they hold in savings and the rate they pay on their mortgage. Don't forget to factor in any additional costs of remortgaging as these could be high depending on the offset mortgage you choose."